Wadsworth Republican Rep. Jim Renacci, who paid the state of Ohio almost $1.4 million in back taxes and penalties in 2008, is pursuing a tax appeal that asks the state to refund $359,822 of that money.

"Legitimate tax planning is not grounds for the Tax Commissioner to impose a penalty on the Renaccis," says an appeal that Renacci's attorney filed in the case.

The dispute stems from the year 2000, when the Ohio Department of Taxation accused Renacci and his wife, Tina, of misreporting their income. The couple filed

state tax returns that year that
claimed they had a loss of $247,336, but auditors determined they
actually made $13,730,440.

The state said the Renaccis hadn't properly reported trust income from an "S"
corporation that was not subject to state taxes for several years before
Ohio's tax commissioner issued a ruling that changed the state's
policy.

S corporations allow income to be taxed at an individual rate
for federal tax purposes, and avoid double taxation on corporate
income. Renacci was among a group of taxpayers who fought the state
decision. He contended the trust income should have been tax-free and that he had "reasonable cause" to exclude it on his tax return, tax department and court records say.

The couple filed a tax appeal when the state
dinged them for $954,650 in back taxes, $146,938 in interest and
$293,876 in penalties. Others dropped their appeals, but the Renaccis continued to fight, even after a 2006 Ohio Supreme Court ruling in a similar case in which the court said the trust income was subject to taxation. In that case, the taxpayers reported their S Corporation income on their 2000 tax return and then unsuccessfully sought a refund.

A 2007 legal brief the state of Ohio filed in Renacci's case observed that nearly all other litigants "who created grantor trusts in an attempt to shelter, i.e. exclude their S Corporation income from Ohio income taxation" gave up their appeals, and that the Renaccis were "almost alone in their persistence." The Renaccis eventually sent the state checks for more than $1.3 million, but they continue to argue that $359,822 of the money that they paid in interest and penalties was improper.

Papers filed by their attorneys say they thought the tax policy change would not be upheld by the courts, and that they relied "in good faith" on what they perceived as a valid interpretation of the tax statute.

"A penalty must not be excessive," their legal briefs say. "Yet the Tax Commissioner assessed the maximum, double interest penalty even though the Renaccis acted in good faith."

The Ohio Department of Taxation says the Renaccis were aware of the change in policy and disregarded it, and thus "failed to act in good faith."

"The Tax Commissioner may abate a penalty when the taxpayer demonstrates that the failure to comply was due to reasonable cause rather than willful neglect," Ohio Tax Commissioner Joseph W. Testa said in an April decision. "The claimants acknowledge that they knew they were filing their return in a manner inconsistent with the Department's position."

Last month, Ohio's board of tax appeals agreed to extend the discovery period in Renacci's appeal until next March. Renacci's lawyer requested the extension on the grounds that his client "is in the heart of his campaign for re-election to Congress."

On Wednesday, the campaign of Renacci's Democratic opponent - Copley Township Democratic Rep. Betty Sutton, unveiled a campaign ad that criticizes Renacci for "trying to avoid paying taxes on nearly 14 million dollars that he made." The Democratic Congressional Campaign committee is also running an ad that says Renacci "tried to skip out on paying over a million in taxes."

Renacci campaign spokesman James Slepian said that by "dusting off this ridiculous, nonsensical attack" Sutton is demonstrating that she is growing "frantic over her collapsing
campaign."

"Jim Renacci does not view taxpayers as a bottomless piggy bank and is
proud to stand with taxpayers across the state in their fight for
accountable government," Slepian continued.

"Years ago, Jim Renacci stood with over 1,000 other Ohioans in
appealing an attempt by the new tax commissioner to impose a unilateral
and retroactive tax on Ohio taxpayers," said a statement from Slepian. "In a 3-2 split decision, the state Supreme Court ruled that the Commissioner had the authority to impose the retroactive tax.
At that time, Jim Renacci paid the assessment in full, including interest and penalties."

"Along with many others, Jim then filed an appeal
over the steep penalties the state tax commission imposed on taxpayers
who had chosen to exercise their right to fight a deeply controversial
and retroactive tax assessment.
That appeal was filed years ago and continues through the appeals process today."

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